India’s Energy Policy and Electricity Production

An Interview with Charles Ebinger

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In an interview with NBR, Charles Ebinger outlines India’s current and future challenges in meeting its electricity demand. He argues that without serious energy and electricity sector reform, India runs the risk of derailing its rapid economic growth.

Dr. Ebinger is a Senior Fellow and Director of the Energy Security Initiative at the Brookings Institution. His latest book, Energy and Security in South Asia: Cooperation or Conflict? (Brookings Institution Press), was released in September 2011.

What are India’s current and projected power-generation needs?

Currently, India has the fifth largest electrical system in the world, with installed electricity capacity of around 180 GW. However, more than 400 million Indians have no access to electricity, and by 2035 India’s power demand is expected to more than double, providing a prodigious challenge for the country.

India’s electricity mix comprises 69% coal, 14% hydro, 10% natural gas, 4% oil, 2% nuclear, and 1% renewables (solar, wind, biofuels, waste, etc). While the amount of off-grid power in India is debatable, depending on one’s estimates, it can skew India’s electricity growth projections dramatically. India’s power deficit in 2010 at peak load was more than 10%. This needs improvement through more investment, particularly from the private sector, in generation, transmission, and distribution. While investment is beginning to occur, the rate at which this is occurring is woefully insufficient.

What are the most serious challenges India must overcome in its energy sector in terms of policy and natural endowment?

The most serious issue India must address is that the gap between energy demand and energy supply is wide and growing. Two reasons for this trend are demographics and economics: not only is India’s economy growing, thereby demanding more energy and electricity, but the population is as well. There is also massive urbanization, which is putting more pressure on energy and the environment.

India’s power network comprises five regions spanning the country. While each is connected with a neighboring region, there are inadequate interregional connections through high voltage transmission lines, creating difficulties for moving power from electricity surplus states to those in deficit. This also creates difficulties on a seasonal basis, as power is often in short supply during the dry season and abundant in some regions during the monsoon but cannot be moved to help other states.

An additional complication is that India’s investment in power transmission and distribution has not kept up with generation. Thus, in some cases, new generation cannot move to the market because of transmission bottlenecks, such as with wind power in Tamil Nadu.

India’s power sector is also plagued by the dual responsibility of the states and the federal government. Power produced and sold in the same state is subject to the oversight of the State Electricity Board and the State Electricity Regulatory Commission, whereas power sold between states is subject to federal oversight and regulation. As of September 2011, about 46% of generating capacity was owned by the states, 31% by central government institutions, and 23% by the private sector. Complicating this situation is that there are far too many state and federal institutions involved in energy decision-making. In the absence of a single institution responsible for the energy sector, comprehensive and sound policymaking is impossible.

Although domestic energy supplies exist, some are limited in amount (e.g., oil) and others (e.g., coal) are located in areas where they are geologically and technically hard to extract. In the case of coal, although India has large reserves, much of it is located far from demand centers or in areas where insurgencies affect production.

These issues are further exacerbated by the country’s policies, politics, and infrastructure. For instance, coal resources, far from their final market, must depend on India’s dilapidated railroad infrastructure that is prone to delays. Many power plants cannot get enough coal and must rely on the expensive spot market or risk power shortages. At a recent talk here in Washington, D.C., Vikram Mehta, Chairman of Shell India, mentioned that coal stocks at roughly 60% of India’s thermal plants were only enough for a seven-day supply. Many plants only have a one-day supply.

In the case of oil and natural gas, the problem is pricing and infrastructure. Because India’s government has not created a positive climate for foreign investors, the country’s reserves have not benefited from the best technology and expertise available. This hurts production. Whereas the average recovery rate of oil in the global petroleum industry is 40%, in India it is only 28%. One way India can promote exploration and production is through pricing reform: currently, private sector investors have no incentive to invest in India due to poor returns on investment. Similarly, the government has not invested enough in infrastructure: its gas pipeline network is woefully under-connected, and although the situation is slowly improving, large parts of India’s south and northeast are not connected to a gas grid.

Moreover, India must also enforce regulations against energy and electricity wastage and cheating. Often it is the wealthy landlords who waste free and cheap electricity rather than the poor farmers it was intended to help. Bribes are often paid to meter-readers, and many government and military buildings and offices pay no electricity fees at all. Providing regulators with enforcement capacity would dramatically curb consumption and increase efficiency.

One final issue is the land acquisition bill under debate in India. This bill must be comprehensive and fair to both owners and purchasers. Most importantly, however, it must be transparent and enforceable. While India’s energy sector is improving, the biggest problem for investors is that translucent regulations and processes drive up private sector costs. A clear and egalitarian bill can accelerate projects in the national interest while providing fair compensation for those displaced.

If India continues on its current trajectory, what might be the impact on economic growth?

As I explain in my book Energy and Security in South Asia: Cooperation or Conflict? (2011), if India does not embark on serious energy and electricity sector reform, it runs the risk of a sociopolitical explosion. Given both its tremendous economic growth fueled by energy and the equally large poverty rate, addressing these issues is perilous. Manufacturing, industrial production, finance, and commerce cannot function without energy. Similarly, energy access can provide a lifeline and an opportunity for economic development.

India’s energy and electricity shortages have already rattled private sector investors. They still invest because India’s opportunities are so expansive, but if energy sector reform does not occur and energy provision does not become more reliable, investment may dry up.

Moreover, any stagnation in India’s growth rate due to energy insecurity can have very damaging effects on the country’s stability. Already India faces challenges from domestic insurgencies and has tenuous borders with Pakistan, Bangladesh, Nepal, and China. Additional insecurity due to a lack of economic opportunity could be devastating.

What measures can India take to reduce carbon emissions and the environmental impact of rising energy consumption?

Foremost, the world must acknowledge that India’s demand for commercial energy is surging. Given the country’s many technical, economic, and political constraints, for the next few decades this demand will be met by fossil fuels.

India and its neighbors are among the countries most at-risk from the impacts of climate change. There are a number of measures New Delhi can take to curb energy consumption and reduce related environmental impacts, but all will require political courage and massive consensus-building. At the risk of sounding like a Cassandra, India must take action on all fronts.

India, to the greatest degree possible, must liberalize all wholesale and retail prices. As long as energy remains free or cheap, consumers have no incentive to use it wisely, conserve, or buy energy-efficient appliances and vehicles. To that point, India should mandate more stringent efficiency standards for appliances, vehicles, and all new commercial, residential, and industrial buildings, with encouragement through fiscal and other promotional polices. The country should also enact policies that encourage energy retrofits of existing residential and commercial buildings.

Similarly, India should move to increase the efficiency of all its power plants to conform to international norms. Investment in a more efficient electricity grid would do wonders for both its energy security and the environment. Rather than building new generation facilities, most of them carbon-emitting, India could deliver more electricity to the end consumer. Today, India’s transmission and distribution losses are astounding.

When widening energy access, one challenge will be deploying as much clean energy as technically feasible. One great opportunity—for rural communities in particular—is distributed generation or isolated renewable energy installations.

India must accept the conflict that the country will be largely dependent on fossil fuels for the foreseeable future but that the reality of climate change is equally inescapable. To that end, in concert with the United States, India should take the lead in establishing a world-class carbon capture and sequestration research and demonstration program. This will help commercialize a technology that addresses a fundamental reality of the world’s energy consumption: fossil fuels will be a staple for decades to come.

What potential is there for both domestic and foreign private sector investment to help meet India’s growing energy demand?

There is a tremendous opportunity, but only if a government emerges in New Delhi that can free the Indian economy from its past ideological shackles. While the federal government publicly embraces private sector investment, it is often loath to give up the reins in many industries. New Delhi must allow private investment to introduce the best technology and operational efficiencies that are integral to building a more responsive energy sector.

Where India has made private-sector friendly reforms, the results have been spectacular. India’s biggest gas discovery was made by a private sector firm. The initial public offering of Coal India raised billions in private investment for the government. Yet for all the excitement generated, the Indian bureaucracy still slows the implementation of reforms. In addition, as the poor are often the most affected by changes from industry, the government must minimize the impact of price rationalization on them. This can be done through more targeted subsidies and better enforcement.

What are the respective roles of the central government and Indian states in establishing and carrying out energy policy?

In India, each state has authority over policy decisions governing how energy is produced, moved, and consumed within its borders. A state can, in effect, set prices for generation, transmission, and distribution. Generally, the prices for the fuel itself are set by the central government or other parastatal institutions. However, if a state wishes to subsidize these prices, which often occurs, it can charge consumers less than it pays for the fuel. Due to this fact, almost all the state electricity boards are bankrupt.

The central government is in charge of a number of public sector undertakings that produce and distribute energy and electricity. However, as these companies are forced to sell their products at subsidized rates, the government compensates them for their “under-recoveries,” which deflates the government’s fiscal coffers. The central government also supports the nationally owned firms that own and build power plants. There are a host of other government-owned and state-owned corporations that are involved in the energy sector. The central government not only creates the rules under which these corporations operate but also ensures that the organizations themselves operate effectively and are responsive to the needs of India’s citizens.

How important is regional cooperation for India’s energy security?

While India needs to reform its energy sector for short- and medium-term energy security, regional cooperation will be vital in the long run. India must avoid the trap of forming an autarchic energy policy as there are great opportunities for energy collaboration with its neighbors, such as trading hydroelectricy with Nepal, natural gas and coal-generated electricity with Bangladesh, natural gas with Iran and Turkmenistan through Pakistan, undersea gas with Oman, gas with Myanmar, and coal-generated electricity with Pakistan. While each opportunity raises a host of geopolitical and foreign policy issues, all must be examined seriously if India has any hope of meeting its burgeoning energy demand.

For example, just over the border from India’s industrial heartland in Gujarat, the Thar Desert contains one of the largest coal deposits in the world. If developed, Pakistan could sell the coal to India and in return India could sell electricity back to Pakistan’s energy-starved province of Punjab. Not only does this make energy sense, it could start to assuage some of the region’s existing tensions. We must remember: India and Pakistan agreed to the Indus Water Treaty in 1960. While not perfect, this strategy offers hope for a win-win regional collaboration.

Sonia Luthra is Assistant Director for the National Asia Research Program (NARP) and Outreach.

This is the fifth in a series of Q&As produced by NBR for the Senate India Caucus. See more Q&As on India.

Charles Ebinger is a Senior Fellow and Director of the Energy Security Initiative at the Brookings Institution.